It was all about interest rates.

It was all about interest rates. But now, it’s all about interest rates–and confidence.

Whether house-price appreciation will continue its growth to infinity and beyond, flat line for the foreseeable future or turn downward from a peak at the top of the charts now depends not just on interest rates, but also on the extent to which potential home buyers feel confident about their jobs, the economy and housing as an investment.

The Conference Board today reported its index of consumer confidence held steady in May after a slight increase in April. Consumers have an overall positive outlook for the next six months, and their outlook on employment continues to show signs of improvement. But while consumer confidence is important to the real estate markets, it might not be as important as home buyer confidence, which remains at a frenzy in some places.

Are home buyers confident about housing as an investment? Take a survey.

Experts have observed ad naseum that rock-bottom mortgage interest rates fueled the housing boom of recent years and that higher interest rates could make housing less attractive to home buyers. Mortgage interest rates have bid farewell to the mid-5 percent range and could brush against 7 percent territory next year, if some economists’ predictions prove correct. Buyers might balk at paying above-list prices for for-sale homes as mortgage payments become more costly. But a 7 percent fixed-rate mortgage or a lower rate on a riskier adjustable-rate mortgage is nothing to sneer at, even if it’s not as attractive as the cheap money that’s been on tap in recent periods.

Home-buyer confidence makes the difference between a housing market that softens and declines due to higher mortgage interest rates and a housing market that continues to be robust despite higher interest rates. Buyers who think the future looks rosy will be much more likely than their pessimistic brethren to buy a house on the belief they’ll be able to handle the mortgage payments.

Houses will continue to appreciate in value this year, judging by Fiserv Case Shiller Weiss’ forecasts for 80 ZIP codes in eight of the nation’s largest metropolitan regions. All of the 80 ZIP codes are in the black, and indeed, there is nothing even remotely like a bubble in this data.

It’s an old truism that people buy houses because they need shelter, and it’s another old truism that marriages, births, relocations, divorces and deaths prompt people to upsize and downsize their housing throughout their lifetimes.

But when the future seems uncertain, renting may seem to be just as attractive as owning. So why buy?

Confidence.

People buy housing rather than rent because they’re confident about their own prospects and real estate as an investment. They believe the economy will expand, jobs will be plentiful and wages will be generous. They believe the world will be safe or at least their own neighborhood won’t turn into a war zone. Indeed, neither the Sept. 11, 2001, terrorist attacks nor the war in Iraq discouraged home buyers, undermined their confidence in real estate or slowed the housing markets.

People also buy housing because they believe home ownership will help them accumulate wealth and avoid income taxes. They believe a home is a better investment than a mutual fund or a bank savings account. They’re fascinated by the status and symbolism of home ownership, and they’re sold on the romance of the America Dream.

Yes, interest rates may rise and house-price appreciation may slow, but there won’t be a housing crash as long as buyers remain confident and therefore plentiful.

***

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